The CIOT has written to HMRC on the extension of the loans to participators tax charge in situations where the loan is made to a third party and then passed on to the participator (CTA 2010 s 459). Although aimed at avoidance arrangements, the CIOT notes that the extended charge also catches ‘completely benign upstream loans, which commonly appear in management buy-out scenarios’ – where the target company lends funds to the company formed by the management team to effect the buy-out.
Given there is no element of avoidance in such cases, and pre-transaction clearance may already have been obtained, the CIOT suggests that ‘it makes no sense from a tax policy or anti-avoidance perspective that there is a risk under the loans to participator rules if the pay-out to a vendor shareholder is funded by intra-group debt. In our view this is not a scenario that the loans to participators legislation is meant to catch because those rules are generally designed to prevent the extraction of profits from companies by way of borrowing, which is simply not happening here.’
The practical point here is that the application of s 459 creates uncertainty of tax treatment for commercial transactions involving share acquisitions. Businesses often recommend clearing all existing upstream loan balances by dividend rather than intra-group loan, which is not always possible or desirable in commercial terms. The CIOT has invited HMRC to discuss possible options, including potential changes to the legislation.
The CIOT has written to HMRC on the extension of the loans to participators tax charge in situations where the loan is made to a third party and then passed on to the participator (CTA 2010 s 459). Although aimed at avoidance arrangements, the CIOT notes that the extended charge also catches ‘completely benign upstream loans, which commonly appear in management buy-out scenarios’ – where the target company lends funds to the company formed by the management team to effect the buy-out.
Given there is no element of avoidance in such cases, and pre-transaction clearance may already have been obtained, the CIOT suggests that ‘it makes no sense from a tax policy or anti-avoidance perspective that there is a risk under the loans to participator rules if the pay-out to a vendor shareholder is funded by intra-group debt. In our view this is not a scenario that the loans to participators legislation is meant to catch because those rules are generally designed to prevent the extraction of profits from companies by way of borrowing, which is simply not happening here.’
The practical point here is that the application of s 459 creates uncertainty of tax treatment for commercial transactions involving share acquisitions. Businesses often recommend clearing all existing upstream loan balances by dividend rather than intra-group loan, which is not always possible or desirable in commercial terms. The CIOT has invited HMRC to discuss possible options, including potential changes to the legislation.
